Credit rating agency Standard and Poor's (S&P) declared Argentina to be in default, after the country's last-minute talks with a court-appointed mediator failed to reach a settlement with holdout creditors.
Despite two days of intense negotiations led by Argentina's economy minister Axel Kicillof, the country could not make a deal. As its deadline to make a payment towards its restructured bonds expired at 2:00 am GMT, the country fell into default – its second in 13 years.
Certain banks in the country proposed to buy out the non-performing debt held by hedge funds and avert a default, but the deal collapsed, Reuters reported citing a senior banking executive and a second source from the financial market.
"It's unfortunate that it came to this. Argentina decided it was better to default than to settle. Argentina will likely find alternatives now to pay the restructured bond holders," said Eric LeCompte, executive director of the religious debt relief group, Jubilee USA Network.
"Argentina never would have defaulted and hold-outs would have been forced to sit at the table if we had an international bankruptcy process in place. In the coming months we'll continue to see the G20 to the IMF try to stop this extreme predatory behaviour."
Argentina has been engaged in a long legal battle with hedge funds led by Elliott Management and Aurelius, which refused to take part in the country's debt restructuring. About 92% of the country's creditors agreed to swap debts and accept less money.
In a major blow to the government, US judge Thomas Griesa earlier gave a ruling that bars Argentina from paying the holders of its restructured debt unless it pays the hedge funds.
Following the adverse order from Griesa, Argentina noted that if the country paid the suitors on their terms, it would lead to claims from other holdouts of around $15bn (£8.8bn, €11bn) in debt.
The government's coupon payment to restructured bondholders through a New York bank had earlier been blocked by Griesa.
The development comes as a major blow for the Argentine economy, which is already in recession. It would damage its reputation further in the international capital market, as it looks to global financiers to repair its economy.